International wood products company Abitibi Consolidated has given notice it intends to close its Stephenville operation and shut down one of its two paper making machines at the company's Grand Falls mill.
The provincial government reacted angrily to the announcement.
In a news release the provincial government discussed details of a proposal to supply electricity to the plants, a proposal that both Premier Danny Williams and natural resources minister Ed Byrne dismissed as being unjustifiable to the people of Newfoundland and Labrador.
The nub of the problem for Abitibi appears to be power costs and power supply. Newsprint manufacturing globally goes through ups and downs. North American operations are increasingly challenged by competition from plants in the developing world and China where operating costs are considerably lower.
The $300 million hydroelectrical proposal called for two new generators producing 60 megawatts. In addition to that development being paid for entirely by the Crown corporation Newfoundland and Labrador Hydro, Abitibi reportedly asked for a discount on power costs amounting to upwards of $14 million per year for a total of 30 years.
The provincial government's tally of the cost is $455 million representing the costs of the subsidy, plus the increased costs to electricity users to pay for the $300 million capital construction program.
While Premier Williams is threatening to revoke Abitibi's timber rights in the event the company carries out the plan to shut down a machine at Grand Falls, this is the hollowest of hollow threats. First, revoking the timber rights as laid out in Bill 27 would effectively close the Grand Falls mill. It is difficult to imagine a government deliberating shutting down a major economic engine in the province's economy under any circumstances. The threat contained in Bill 27, passed under the Grimes administration was nonsense when it was first uttered and it remains a nonsense.
Second, taking that action would leave the province liable to being sued by Abitibi for unfairly and arbitrarily penalizing the company for taking what are essentially normal operating decisions.
The government's goal here is clearly to keep the two mills operating. The company, meanwhile, is concerned to keep them operating as well, but at reduced costs.
A closer examination of the electricity scheme and public comments by government ministers suggests that the only major issue separating the two parties is the issue of who will own the hydro plants at the end of the 30 year agreement.
This is interesting on two counts. First, the issue is relatively small. Abitibi need have no interest in owning generating capacity if it does not own the mills the plants would service. If it does not have the capital to build its own generators, then its share of the new projects could be as simple.
Second, despite the protests to the contrary, it is only logical to conclude from comments by Minister Byrne and his colleagues that government would be willing to finance a new generation scheme and subsidize Abitibi's power. The costs, described as exorbitant, would therefore not be so burdensome after all.
Perhaps this becomes more clear if one looks closely at the cash involved and the options available.
The government's estimated cost of the project is $300 million. This represents the highest of three estimates of the cost for building two new hydroelectric projects. In the ordinary course, the hydro corporation would borrow the money and then pay for it through increased electricity rates. This is what Minister Byrne noted when he talked of a four percent rate increase for consumers and a two percent increase in rates for business.
Yet, the provincial government just received $2.0 billion in cash from Ottawa. Amortized over 30 years, the capital cost of the construction project is a mere $10 million. That works out to be far less than one year's interest on the offshore cash in one instance or, a paltry sum even if taken out of the offshore cash.
Bear in mind that the provincial government and its supporters maintain that the offshore deal is worth in excess of $10 billion.
Consider, as well, that the $300 million represents the high-end estimate. Were Hydro to contract the work to the private sector, then it might actually be brought in at a lower cost.
Government could easily gift the money to Hydro and not be out of pocket for much, if anything. In exchange for this one-time capital construction, the government secures the jobs in two communities, guarantees that the mills have secure power in the event Abitibi wishes to sell off its operations, and in the worst case has low cost power to supply businesses and consumers in the province if the paper mills shut. If no money is borrowed, there is no interest to be paid on the loans and hence no real need to raise electricity costs to end users. Cheap power attracts business.
Beyond that, the provincial government can also simply sell the power to Abitibi at a nominal rate. This amounts to an indirect subsidy to Abitibi - no cash actually changes hands - and reflects a variation on the sort of financial incentives companies often receive in order to set up a business here.
For those concerned about the long-term, it is simply a matter of inserting a clause that obliges both parties to renegotiate the price of electricity on a regular basis. This allows the province to increase electricity rates should the world-wide newsprint markets rebound. And it precludes Abitibi from subsidizing its global operations with savings in Newfoundland and Labrador.
As much as we may all decry such subsidies, the actual amount here is relatively modest on an annual basis. Even the government's own worst case estimate is that the subsidy amounts to $14 million per year. The total of $455 million is based on the deal operating for 30 years. If Abitibi closes it mill or mills before that the deal could cost much less.
Put that up against the 772 jobs at Abitibi in Stephenville and Grand Falls and the others in the two communities that depend on the mills. Put the annual cost of $14 million in subsidy against the 408, 000 metric tonnes of newsprint the mills produced in 2004 at a market value of about $225 million. Then think about the corporate and other taxes the company pays to the province.
All things considered, it is possible the provincial government is not as angry at Abitibi as it might seem. Abitibi may be pushing back at a government which was already playing hard ball at the negotiating table. Read between the lines of government's news release, add in a few other considerations and you get the sense the provincial government will be putting some new cash into Abitibi through reduced power rates.
The offshore cash can produce a lasting benefit if it is used properly. Is there a better use than securing over 700 jobs in the best case and in the worst case having low-cost power readily available for a new enterprise?
